Discounts vs. Rates: April's New Home Sales Surprise Explained
Former JPMorgan Chase Global Chief Economist & Current Global Keynote Speaker
In a surprising development, U.S. new home sales rose unexpectedly by +10.9% in April 2025, defying widespread expectations of continued weakness. With mortgage rates hovering near multi-decade highs, most analysts had anticipated a sluggish housing market, particularly in the new construction segment. Instead, the Commerce Department reported a notable increase in new home purchases—a move that left many economists scratching their heads. However, if you look beneath the surface, a compelling explanation begins to emerge: prices dropped -2.0 % (YOY) in April 2025, due to aggressive builder incentives, may have outweighed the deterrent effect of elevated borrowing costs.
Source: U.S. Census Bureau
A Market that Defied Gravity
For much of the past year, the narrative surrounding U.S. housing has focused on the erosion of affordability. With 30-year fixed mortgage rates remaining near or above 7%—double their level in early 2022—monthly payments for new homebuyers have surged, sidelining many potential purchasers. Analysts predict that new home sales will continue their downtrend in April.
Source: Freddie Mac and St. Louis Federal Reserve
Instead, April’s figures presented a different narrative: seasonally adjusted annual new home sales rose more than anticipated, signaling a rare moment of resilience in a typically rate-sensitive sector. The data surprised many, particularly against the backdrop of persistent inflation, cautious Federal Reserve policy, and stagnant real wage growth.
Yet, the source of the rebound was not demand strength per se—it was price flexibility.
Builders Blink First: Incentives and Discounts
Homebuilders, sitting on growing inventories in several key markets, chose to meet buyers halfway. According to industry data and multiple builder disclosures, incentive packages in April reached as high as 10.5% of the home’s sale price in some instances! These included mortgage rate buydowns, closing cost coverage, and outright price discounts—especially in markets like Phoenix, Dallas-Fort Worth, and Jacksonville, where speculative building earlier in the cycle resulted in excess supply.
The National Association of Home Builders (NAHB) reported that the proportion of builders offering incentives increased to 60% in April, up from only 47% three months prior. More significantly, the average incentive value soared to $34,000, the highest level since 2009 when builders were attempting to clear inventory in the wake of the Great Financial Crisis. With increased incentives and higher incentives, Homebuilder sentiment moved sharply lower in April 2025.
The latest Homebuilder Survey reported that 34% of builders reduced home prices, which was the highest percentage since December 2023, when the figure stood at 36%. Approximately 61% of homebuilders used sales incentives in April 2025, a feat that was repeated in May 2025.
National Association of Homebuilders Survey
NAHB/Wells Fargo Housing Market Index: Source Realtor.com
As a result, effective prices paid by buyers fell enough to tip the affordability scales for some households. Although the median price for new homes dropped by 2.0% on a year-over-year, the drop was far steeper at 4.6% after adjusting for incentives and regional mix. With some buyers finally seeing value, sales volume responded, despite the weight of mortgages with rates of 7% or higher.
Supply-Side Shift: A Key Driver
Underlying the move was a broader shift in supply conditions. After a period of suppressed building activity in 2022–2023 due to labor and material shortages, many builders accelerated completions in late 2024 as input pressures eased. By early 2025, inventories of completed new homes reached a 30-month high of 8.1 months! A six-month inventory is considered normal.
Source: U.S. Census Bureau
This rising inventory put downward pressure on prices and forced builders, particularly public ones facing shareholder demands for capital efficiency, to prioritize volume over margin. In markets with the most significant inventory overhang, such as parts of Texas, Florida, and the Carolinas, price reductions were even steeper than the national average.
In short, what we witnessed in April was a tactical retreat by builders, offering price breaks and perks that made ownership pencil out for buyers who had been sitting on the sidelines.
Historical Context: When Prices Overpower Rates
This scenario—where falling prices spur buying despite high mortgage rates—is rare in U.S. housing history. But it's not without precedent.
Early 1990s: After the late-1980s housing boom, real prices in the U.S. declined for several years while mortgage rates remained elevated (8–9%). Although national home sales were tepid, some local markets, such as Portland and Denver, saw stabilization or even growth as affordability improved. Buyers willing to look past rate headwinds could find bargains.
Early 1980s: The era of 16% mortgage rates nearly froze the housing market. However, even then, life events—such as marriage, job relocations, and expanding families—kept a steady demand alive. Where home prices softened, some buyers with stable incomes were able to find entry points, particularly in the latter part of the decade as inflation expectations began to fall.
2000s Exception: From 2004 to 2007, mortgage rates were modestly elevated, but prices surged due to speculation and lax lending, clearly not a parallel to today. Prices didn’t fall; they inflated a bubble.
Thus, the closest analog to today remains the early 1990s: a period when affordability, achieved through lower real prices rather than lower rates, encouraged cautious buyers to move off the sidelines. While that era still experienced suppressed overall activity, it provides precedent for how price flexibility can counterbalance rate rigidity, at least temporarily.
Is This Sustainable?
The durability of April’s rebound remains uncertain. While the headline sales number was encouraging, it remains unclear how much further builders can or will go in offering incentives. Many have already sacrificed profit margins to keep inventory moving, and some may pause discounts if demand stabilizes.
Moreover, macro headwinds persist. The Federal Reserve, facing persistent inflation in the services sector, has signaled that rate cuts are unlikely in the near term. If mortgage rates remain stuck in the 7% range or edge higher, the affordability equation may again shift unfavorably, especially if builders scale back discounts or if material costs rebound.
There’s also the psychological factor: April’s rebound may partly reflect pent-up demand rather than the beginning of a new trend. Buyers who had delayed for months may have taken advantage of temporary deals, creating a short-term spike in activity. Unless employment growth or incomes increase significantly, demand may not be sustained at current levels without ongoing price concessions.
Summary and Concluding Thoughts
The unexpected strength in April 2025 U.S. new home sales serves as a helpful reminder that affordability is a function of more than just interest rates. While mortgage rates grab headlines, the price paid—and what buyers get for that price—can meaningfully influence purchasing decisions.
April was a rare case where falling prices and rising supply overcame high financing costs, encouraging some buyers to reenter the market. While the trend may not last without further support, it highlights the role of builder flexibility in maintaining housing market activity during times of monetary policy tightness.
For housing market watchers, the lesson is clear: housing isn’t just about rates—it’s also about supply, incentives, and buyer psychology. For buyers, April may have presented a brief opportunity when price cuts coincided with a still-competitive lending climate. Whether that opportunity remains is now dependent on U.S. credit markets, the broader economy, and the determination of America’s homebuilders.